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Investors in fallen fund face tough court test

September 23, 2008

Litigation is mounting after Reserve Management Co., a firm that pioneered the money-market mutual fund nearly four decades ago, became the first ever to expose retail clients to losses by “breaking the buck.” It was among a handful of funds that earned that dubious distinction last week — a first since 1994.

Though money funds are generally viewed to be nearly as safe as cash, plaintiffs can’t expect to recover losses just because fund managers allowed assets to fall below $1 for each dollar put in.

Investment accounts are subject to losses and money-market funds are no exception. Investors looking for legal recourse may have a tough road ahead. To win in court or recoup losses through any action by regulators, investors likely will have to show misconduct on the part of a fund’s managers, such as favoring certain clients over others, or making riskier investments than were allowed under the fund’s criteria, legal observers say.

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